AroundTown/Grand City Properties - A New Perspective
All,
Please find our updated analysis on AroundTown here and its subsidiary, Grand City Properties, here.
As part of our process of re-examining the Heimstaden capital structure, we have also updated our analysis of Grand City Properties and AroundTown. While these real estate names no longer provide outsized event driven opportunities and are now at the lower risk end of our coverage, they still provide strong yield in RV terms when compared to similarly rated bonds.
Investment Rationale - Grand City Properties:
- We have previously had a position in both the Hybrids and equity, but have exited both previously. The yields on the Hybrids are no longer attractive for us, and we are not considering entering into a position currently. Grand City Properties Unsecured trade c. 3-5% depending on maturity, too tight for our considerations. We see limited downside, though, as the Company's results continue to improve.
- The two main liquid perpetuals trade close to/above par, leaving very little upside. The downside in the short term is limited as GCP continues to improve its balance sheet.
- In respect of the equity, there remains an investment case for going long the equity. The discount to Book Value is excessive, despite peers' discounts narrowing. However, we had expected the recommencement of dividends to be the catalyst for the equity, but the dividends remain suspended.
- Grand City Properties continues to trade at a c.30% discount to Book Value. This is in contrast to other listed real estate operators, who have seen the discount contract over the last couple of months. For example, Vonovia currently trade at a 20% discount to NAV.
- We would expect GCP equity to trade higher over the coming quarters, which will be aided by a recommencement of dividends. A similar discount to Vonovia would see a 20% increase in the shares.
Investment Rationale - AroundTown:
- We exited our 5% long position in the 5% Hybrids at 89% in April. We originally purchased 4% at 58% in June 2024, topping up the position further at 86% in September. At current levels, we are not minded to re-enter the trade. AroundTown Unsecured trade c. 4-6% depending on maturity, too tight for our considerations. This is 100bps wider than GCP, which we view as appropriate. The Downside for the Unsecured will be driven by macro factors, as AroundTown continues to improve its balance sheet.
- The liquid perpetuals trade close to par, leaving very little upside. Similar to the Unsecured, the downside will be driven by macro factors.
- Our other concern for both AroundTown and the wider real estate entities is a renewed effort to modernise its estate, which may lead to a sustained higher CAPEX level in the future. We were a little surprised this topic received little attention on the recent calls.
Recent Results:
- Grand City Properties continues to benefit from robust fundamentals in the German residential market, where supply shortages and broader macroeconomic factors are driving rental growth across urban areas. In Q1, the company achieved a like-for-like net rental growth of 3.8%, partially mitigating the impact of net disposals. Net rental income rose by 1%, while EBITDA improved by 3%. GCP will not pay a dividend for 2024, which is a little surprising, but reflects the recent downgrade and the aim of maintaining financial flexibility and cash headroom.
- Key credit metrics showed modest improvement during the period. Given the company’s solid liquidity position, we question the rationale behind S&P’s recent downgrade of Grand City Properties to BBB. The downgrade, which also affected Aroundtown, was attributed to heightened macroeconomic uncertainty and a weakening German economy—factors expected to slow Aroundtown’s deleveraging efforts.
- Q1 results for AroundTown reflected the continued positive momentum. While the pace of disposals was slightly below our expectations, the company remains committed to further asset sales in order to strengthen its balance sheet. Management has indicated that dividend payments are expected to resume in FY26.
- Within the results, the office segment recorded like-for-like (LFL) rental growth of 1.6%. Notably, AroundTown is in the process of securing permits to convert select office properties into serviced apartments, with the majority of these projects expected to commence operations in 2026.
- The hotel segment delivered a robust performance, posting 3.7% LFL rental growth. This was primarily driven by a steady increase in international arrivals and overnight stays, which continue to support the sector’s recovery.
Relative Trading levels:
- In respect of unsecured bonds, both GCP and AroundTown 5yr trade at c. 3.5% range, which is tight versus Heimstaden Bostad. This is partially explained by the lower LTV, at c.35% versus Heimstaden Bostad’s 67%.
- However, this is not replicated at the Hybrid level, with GCP and AroundTown’s hybrids trading wide to Heimstaden Bostad, on a running yield basis. However, over the last couple of months, all real estate names have rallied in conjunction with the increased confidence in the European real estate sector.
We will continue to monitor AroundTown/Grand City Properties, but at this moment, we don’t see an investment opportunity.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk